Deborah Adams Kaplan

In summer 2020, hospitals were reeling from the COVID-19 pandemic. Personal protective equipment was in short supply. Revenues cratered with the cancellation of elective surgeries. Frontline workers tried not to get sick as they treated waves of infected patients.

Also during that tough summer, five drug manufacturers announced they were potentially ending 340B Drug Pricing Program discounts to hospitals and other types of providers — “covered entities,” in the parlance of the program — for any medications dispensed by contracted pharmacies. Now the number of manufacturers actually or considering restricting discounts has grown to 17, including big names like Johnson & Johnson, Merck, Bristol Myers Squibb, AstraZeneca and Pfizer.

The restrictions have spawned a flurry of lawsuits, 16 so far, mostly manufacturers suing the federal government to vacate its order to comply with 340B discounts.

The program has so many lawsuits that Emily Cook, a partner at McDermott Will & Emery started a 340B litigation tracker. The contract pharmacy issue makes up almost half of the 37 340B lawsuits.

As these legal issues slowly get resolved, hospitals and other providers participating in the program have seen a significant source of funds vanish. 340B Health, a membership group and lobbying organization for more than 1,400 participating hospitals and health systems, conducted a survey of 500 hospitals in March 2022. It showed that larger, mostly urban hospitals anticipate an annual median loss of $2.2 million due to the missing 340B discounts and that 10% of the health systems expect at least a $21 million loss in savings each year. Smaller, mostly rural hospitals expect a median $448,000 loss in savings annually, with 10% of them anticipating at least $1.3 million in losses annually.

Hospitals participating in the 340B program provide 60% of the country’s uncompensated care and 75% of the hospital care for those with Medicaid, according to 340B Health. “These are some of the largest drug companies in the world,” and the restrictions include some of the most important drugs patients rely on, including chemotherapy drugs, says Bharath Krishnamurthy, senior associate director of health policy and analytics at the American Hospital Association (AHA). “Hospitals rely on these relationships they have with community pharmacies to ensure that their patients have access to these drugs.”

Proponents of retaining the discounts say that the loss is harmful to hospitals’ abilities to provide services to individuals with lower incomes and to even keep the health system’s doors open. Critics of the program, most of whom are drug manufacturers, say the program has grown too large, with for-profit pharmacies and health systems reaping profits and not sharing evidence of whether the funds are used to help the intended patients.

The 340B program was created in 1992 to replace the voluntary discounts manufacturers provided to some safety-net clinics. Pharmaceutical companies that want their medications covered by Medicaid or Medicare Part B must offer 340B discounts, usually 25% to 50% — and sometimes higher — to organizations that participate in the program. Healthcare providers receiving the discount are then reimbursed by payers at normal prices. They pocket the difference, with the understanding that the funds should be used to provide that charitable care for people who are uninsured or underinsured.

In 1996, hospitals and clinics without their own pharmacies were allowed to designate one contracted pharmacy. In 2010, the Affordable Care Act (ACA) allowed entities covered by 340B to contract with an unlimited number of pharmacies to dispense outpatient medications. The thinking was that additional pharmacies would mean greater access for patients in socioeconomically disadvantaged communities. But that change led to rapid growth in contracting pharmacy arrangements under the 340B program and, say the critics, a distortion of what the ACA and the 340B program were trying to accomplish.

The University of Michigan Health System had three pharmacy contracts in 2011. By 2021, that number had grown to 598 contracts. The Cambridge Health Alliance in Massachusetts went from 77 contracts in 2012 to 563 in 2021. Rush University Medical Center in Chicago went from four in 2012 to 468 in 2021.

According to the Government Accountability Office, about one-third of the 12,000-plus covered entities in 2018 had agreements with contracted pharmacies. In 2010, there were 1,300 contract pharmacies. Over the next decade, the number skyrocketed, and by 2021, there were 31,000, according to Kaiser Health News.

The program mushroomed for other reasons. In its early years, not all healthcare organizations knew about 340B, Cook says Also, in addition to allowing an unlimited number of contract pharmacies, the ACA made critical access hospitals eligible to participate, expanding the number of participants. Critical access hospitals, a CMS designation, are smaller hospitals in rural areas.

“This program was really envisioned as a small safety net program, but now more than half of all hospitals in the United States participate,” says Karyn Schwartz, vice president of policy and research for PhRMA, a trade organization representing the pharmaceutical industry.

Although the loosening of the rules to allow for an unlimited number of contract pharmacies in the 340B program began in 2010, it took a decade for pharmaceutical companies to decide to restrict the discounts. Why the delay?

“The very short answer as to ‘Why now?’ is that the drug manufacturers are likely to get a more favorable outcome now than they would have if they (had) litigated this probably five years ago,” says Cook. Several recent Supreme Court cases resulted in regulated entities gaining opportunities to challenge federal interpretation of statutes, including a ruling in June in favor of the AHA, which challenged cuts to drug reimbursement to hospitals in the 340B program.

With 340B, “we have a statute that does not have defined terms in it, and it is open to a very wide range of interpretations that have not previously been litigated. And so the parties are now having to turn to the courts to interpret that statute,” Cook says.

The statue’s lack of clear definitions, such as the role of the contract pharmacy and how the funds are spent, is causing many of the problems leading to the current issues. “There are 15 entities listed in the statute that manufacturers are required to provide discounts to, and contract pharmacies are not listed,” says Nicole Longo, senior director of public affairs for PhRMA.

Not everyone agrees. “We think the statute is clear,” says Aimee Kuhlman, vice president of advocacy and grassroots at AHA, adding that it was concerning — and wrong — for the drug companies to eliminate payment discounts for drugs dispensed at contracted pharmacies. The 340B statute doesn’t specifically mention contract pharmacies, but it does say that pharmaceutical companies must provide these discounts to eligible hospitals through pharmacies, says the AHA’s Krishnamurthy. The statute is necessarily broad because when creating the program, Congress recognized that each participating hospital’s situation was unique, so it gave the hospital flexibility to use the savings as they saw fit, he says.

The government does not require covered entities to share how they use the 340B funds. “It’s certainly possible they’re spending it investing in more care for low-income communities, but we’ve seen no real evidence of that,” Schwartz says. “I think that the biopharmaceutical industry’s main concern is that we provide tens of billions of dollars in discounts every year with no way of knowing how that money is being used to help patients, and we just have to take hospitals at their word.”

In 2018, the AHA issued 340B good stewardship principles recommending that participating hospitals annually share the estimated savings amount and the services funded with the savings. “As far as any additional calls for mandatory transparency, I think that there is some concern about cherry-picking information that doesn’t necessarily tell the full picture of what hospitals are doing to serve their communities,” Kuhlman says.

Some manufacturers are offering the discount for drugs dispensed at contract pharmacies if the healthcare organization provides additional information not required by the government. “Each manufacturer has its own requirements in terms of what they’re allowing and not allowing and what types of data they want and need,” says Krishnamurthy of the AHA. That might be detailed claims-level data. “For hospitals, the biggest concern is burden. They have to aggregate the data from different vendors that they contract with, (put the data) all together in a format that is different for each manufacturer and then submit (the) data, and then wait to see if there are any issues with the data they’ve submitted and correct that.”

Some manufacturers — Novartis, for example — are offering the discount only for contract pharmacies located within a 40-mile radius of a covered entity, which can be difficult if a patient in a rural area needs specialty drugs. Others have reverted to allowing only one contracted pharmacy to be included, Krishnamurthy says.

The swarm of controversy and litigation surrounding the 340B program isn’t going away any time soon. At a minimum, the lawsuits are putting a fresh spotlight on the program and raising questions about whether it benefits patients, says PhRMA’s Longo. When measured by the amount of money paid by payers and patients, the 340B program is the second-largest federal prescription drug program after Medicare Part D, and by 2026, it is anticipated to be the largest drug program in the country.

In addition to mandatory transparency requirements, Schwartz would like to see regulatory requirements allowing patients accessing drugs through a covered entity to have access to a sliding scale for purchases, so they don’t have to pay list prices. Not all medication discounts are directly passed on to patients. “As we’re having a broader discussion in the United States about addressing health inequities, it’s even more important to make sure our safety-net programs are working,” says Longo. “We hope that all the stakeholders can come together and find ways to fix the program because the industry continues to be committed to this program. But it needs to work for patients.”

The AHA says that these actions are hurting hospitals and affecting their ability to care for patients. “It’s just a very poor decision of manufacturers to enact these policies and hurt the providers and patients that needed the most,” says Krishnamurthy.

The contract pharmacies are not directly covered by the 340B program and do not receive the discounts from the manufacturers themselves. The discounts are given to “covered entities,” such as hospitals and federally qualified health clinics. These pharmacies have contracted with the covered entities. They can dispense the medications for these covered entities and get paid for doing so. If the drug manufacturer does not provide the discount for these pharmacies to dispense, the covered entity receives no financial benefit from the 340B program to use for its charitable care. Pharmacies receive payment for dispensing the medications.

This article originally appeared on Managed Healthcare Executive.

Articles

Drug manufacturers are rejecting the program’s blanket discounts involving contract pharmacies. A flurry of litigation has ensued.

What's the Future of the 340B Program?

In 2019, Express Scripts PBM (pharmacy benefit manager) formed Ascent Health Services GPO (group purchasing organization), based in Switzerland. In 2020, CVS Caremark formed Zinc GPO. And in 2021, OptumRx formed Emisar Pharma Services, based in Ireland. With pharmacy benefits for approximately 75% of U.S.-covered lives under their control, why would these PBMs need GPOs — to capitalize on their scale to get better drug prices?

“In each case, there’s what the PBM said, and then you have to do your best to fill in the blanks of what could possibly be going on,” says Howard Deutsch, principal at ZS Associates, a global professional services firm with offices in Boston. “They haven’t said a heck of a lot. They’ll say things about serving customer needs, but nowhere will you find some particular customer need that is better being served by the existence of this new entity.”

With the Big Three PBMs already covering a majority of prescription claims, “the idea that they needed to create some sort of new entities so they can have some bargaining power is kind of ludicrous,” Deutsch says. “They already had plenty of bargaining power and were using that quite effectively. It’s unclear from what they’ve publicly said what the value proposition is to the rest of the healthcare system. The value proposition to the PBM is somewhat clear.”

Pricing is one reason Ken Paulus, president and CEO of Prime Therapeutics, gave in an interview last year with 

. Prime entered into an agreement with Express Scripts three years ago whereby Express Scripts handles some of the negotiations with pharmaceutical manufacturers. As a minority owner of Ascent GPO, Prime has direct access to all the GPO contracts and received savings it would not have gotten otherwise, Paulus said in the interview. Prime still processes its own claims and performs utilization management, Paulus said, but the GPO was “a fairly elegant solution for us to save significant dollars for clients and members and employers, but do so without giving up our strategic optionality, which is continuing to run our own business.”

Alan Lotvin, president of CVS Caremark, CVS Health’s PBM, said in a recent interview with 

 that the GPO was a way for CVS Caremark to “separate out all the different lines of business onto separate contracts” and gain some bargaining power.

“It wasn’t, at least in our minds, so much about regulation,” Lotvin said. “I thought about more that if we have a single rebate contract that covers multiple lines of business, if one line of business is impacted by a decision, if I have to go back to pharma and renegotiate, I am renegotiating from a position of weakness. So, if I disaggregate proactively, now I’ve taken a tool away from the manufacturers.”

With the consolidation in the PBM industry and with large payers now integrated with PBMs, “the payer value proposition is pretty important,” observes Ashraf Shehata, national sector leader for healthcare and life sciences for KPMG, a consulting and accounting firm. Over the years, PBMs have moved into a shared services role within their health plan owner systems. The PBM would typically be the largest single entity in the shared services business. But Shehata anticipates seeing other capabilities like care management, IT services and data analytics moving into various shared services buckets as these frameworks for large multientity payer enterprises mature.

GPOs negotiate prices of drugs, medical products and devices for members. In healthcare, the members have traditionally been hospitals and nursing homes. The idea is to lower prices and reduce transaction costs by increasing the purchasing power of a larger group. The GPOs are often member-owned and funded by administrative fees.

The spate of GPO launches by PBMs came as Congress was debating legislation that would establish new transparency requirements for PBMs, notes James Gelfand, executive vice president, public affairs, of the ERISA Industry Committee, a trade association representing large employers. Transparency language was included in the Lower Health Care Costs Act in 2019, which the PBMs lobbied against, according to Gelfand. PBM transparency provisions are also included in the now-defunct Build Back Better bill.

Gelfand finds the timing for forming GPOs suspicious. “Are you creating another intermediary in the supply chain to prepare for transparency requirements that are going to be specific to the PBM?” he asks. Many have worked to bring more transparency to the drug supply chain and healthcare system in recent years. With so many entities involved in the drug supply chain, such as insurance companies, PBMs and vendors that set up and run the plans, adding another intermediary — the GPO — risks losing some of the progress made, Gelfand believes.

Employers want to know whether the new GPO entity will retain rebates or discounts instead of them going back to plan sponsors, Gelfand says. Will this new layer add costs? Will GPOs be able to negotiate better than the PBMs? Will the PBM use the excuse that it cannot provide the requested data or information because the GPO has it and there is a firewall?

“We have moved pretty far ahead in terms of making sure that the plan sponsor owns the plan and the data in the plan. But this could be a setback depending on how it’s implemented,” Gelfand says.

Vendors will always say they are performing better and overall savings have improved. But plan sponsors need to do complex data reconstruction and analysis to be sure. “Vendors are going to guarantee us that we’re reaping the benefits of lower prices, but it’s a trust-but-verify situation. I haven’t had time to verify,” Gelfand says.

Deutsch suspects that the new GPO layer will keep some of the rebates and only pass through a percentage to the PBMs. With PBMs, “almost every single penny on the dollar is passed through to the plan sponsors now,” so PBMs do not have that revenue stream. The GPO can take a cut through an administrative or data-use fee to retain some of the rebate, he said.

Ultimately, many experts anticipate prices going up. “I don’t see how you can add another middleman and not add more cost to the system,” says Kevin Young, co-founder and chief product officer of Prescryptive, a prescription data platform with a PBM product.

“It’s going to be up to the plan sponsor to evaluate the benefits and the value they’re getting from the PBM relationship,” says Shehata. If the overall benefit is good, they will not care about individual fees, he says. “Most buyers of PBM services and most consultants that evaluate (PBM contracts) look at the total value rather than separating individual fees.”

Outside experts also have questions about why Express Scripts located its GPO in Switzerland and OptumRx did so in Ireland. “They stand to lose a lot if they get regulated on rebates,” notes Young. “Creating another organization that’s offshore, they can protect their interests, protect their shareholders’ interests.” Europe does not make much sense as a location for U.S. healthcare entities, says Deutsch: “Switzerland is not exactly a hotbed of U.S. pharmaceutical activity.”

But Shehata thinks placing the GPOs outside the U.S. makes sense: “Going back to that shared services model, the belief is that many organizations build shared services structures at a global scale to actually optimize their ability to work at scale.” He says many payers run organizations in multiple countries and have global businesses ranging from infrastructure to call centers. “I think of this as consistent with their global delivery model and less of a short-term move to try to reduce liabilities.”

No matter where a vendor is located, Gelfand wants to make sure it is still subject to transparency and accountability rules. “I don’t know that basing your company in another country gets you out of any of that,” he says. “If being based in Ireland or Switzerland gives you a better tax rate, that’s not our business as customers. We don’t care about that. We care about what effect will it have on patients and our ability to provide the best benefits for the patients.”

GPO creation “could be a really good thing or it could be a really bad thing. And … it’s too early for us to tell,” Gelfand says.

The Big Three all set up group purchasing organizations recently, but some industry observers question the timing of the move and who will benefit.

PBMs Are Starting Group Purchasing Organizations Leading to a Question of Why

Difficulty gaining access to behavioral healthcare is nothing new, but the COVID-19 pandemic threw the imbalance between need and access even more askew. The pandemic has led to more people experiencing mental health conditions such as anxiety and depression disorders (or a combination of the two). In 2019, 11% of adults screened positive for anxiety or depression symptoms.

In April and May of 2020, during the first few months of the pandemic, that proportion tripled to about 33%, according to U.S. Census Bureau data. Barriers to access include the ability to reach and travel to providers; provider availability; social factors, such as a reluctance to get help; and, most importantly, cast.

Access to services is especially important to Medicaid enrollees, who have also experienced increased levels of behavioral health problems during the pandemic, according to a Kaiser Family Foundation (KFF) report on Medicaid expansion of behavioral health services. The foundation’s annual budget survey of state Medicaid officials showed that all the states responding to the survey reported implementing at least one behavioral health initiative to expand access during the past couple of years by, among other things, offering crisis service and expanding telehealth. “You really see so clearly that every single state that we surveyed reported at least one initiative to expand behavioral healthcare initiatives,” says Madeline Guth, a policy analyst on the KFF and author of the Medicaid behavioral health report.

This isn’t the first time the government has stepped in and attempted to improve access to mental health services. The 2008 Mental Health Parity and Addiction Equity Act banned payers from making mental health coverage more restrictive than physical health coverage, although there are still plenty of parity gaps. A 1996 law with the same name ensured that large group health plans could not impose less favorable lifetime or annual mental health benefit limits compared with medical/surgical benefits. The Affordable Care Act required all health plans to categorize mental health and substance abuse disorder services as essential health benefits.

Medicaid coverage is a critical piece of behavioral health coverage in the U.S. because the programs cover a disproportionate share of the people with behavioral health issues. As of July 1, 2021, Medicaid programs in 44 states and the District of Columbia covered telehealth services for mental health issues, including audio-only services, according to Guth’s report. In the past, behavioral health services have often been carved out of Medicaid managed care contracts, which, in some cases, undercut parity. Guth’s report shows that about three-quarters of the 41 states that have Medicaid managed care programs have carved in behavioral health services.

Newer government initiatives are also addressing access to behavioral health. The American Rescue Plan Act provided expanded Medicaid funding for some behavioral health providers and crisis centers, and the Build Back Better Act, if enacted, would provide additional community mental health services funding.

One way to provide better access is through care integration. Nearly half the states in the KFF survey reported integrated services initiatives whether by allowing for behavioral health and medical service payments on the same day or providing these services in the same location.“We may be seeing elevated behavior health needs for some time to come,” notes Guth.

A Kaiser Family Foundation survey found that all the responding programs had at least one initiative to expand behavioral health services. 